Insurer escapes third party claim

Nothing ever seems to go smoothly when a claim under the Third Parties (Rights Against Insurers) Act 1930 is in prospect. Upon insolvency of an insured this provides for the insured’s rights under any insurance policy it holds to be transferred to a third party for the purpose of enabling the third party to claim against the insurer.

Although it is 80 years since the Act was passed, its effect has been decidedly limited in the construction field. The courts have held that in order to make a claim under it, a third party needs to establish the liability of an insolvent insured by securing a judgment in a separate action. Only then can the third party proceed against the insurer.

While this problematic position will be swept away when the 2010 Act comes into force (probably next year), there will still be problems for third parties seeking to take advantage of the rights the Act confers.

It’s all in the timing

The recent case of McIlroy & another v Quinn showed up a difficult practical problem for third parties. It was all in the timing. A contractor had caused a fire and the building owners sued it. Once they got judgment and damages were assessed, the contractor immediately went into liquidation. The building owners became aware that the contractor had the benefit of liability insurance and sued the insurer under the Third Parties Act 1930.

At this point, the building owners discovered (presumably to their horror) that the insurance policy contained a potentially lethal clause requiring a dispute between the insurer and the insured to be commenced within nine months by arbitration or the claim would be deemed to be abandoned. Although the rights under the insurance policy vest in the third party after an insolvency event takes place, it was too late to serve notice of arbitration.

Could anything be done to retrieve the situation?

One possible line of attack was the date upon which the dispute arose between the insured and the insurer. Was this:

The date when the insurer repudiated liability (a year before the judgment); or

The date when the insured’s liability was established in the third party action?

The court decided that it was the former since, at that stage, the battle lines had been drawn between insurer and insured. At that point, the insured could have brought a claim for a declaration against the insurer for wrongful repudiation even though it did not know exactly the amounts for which it would eventually be held liable.

The court also indicated (having determined it was the wrong forum to decide the matter, it being subject to the jurisdiction of the Irish court), that it would not have ordered an extension of time under section 12 of the Arbitration Act 1996 for the third party to give notice. It could have done so if the conduct of the insurer made it unjust to hold the insured to the strict terms of the provisions in question. However, the insurer had sent the original policy to the insured some four years previously and it had simply been renewed in the same terms each year. The insurer had warned the insured to carefully consider the terms of the policy and had been entitled to believe that the insured had done so. The insurer had not caused or contributed to the failure of the insured to comply with the time limits.

Finally, the third party (perhaps somewhat desperately) latched onto wording in a “Sourcebook” for insurers published by the FSA. This said that an insurer should not seek to restrict liability unless it was reasonable to do so. The court held that it was reasonable to rely on the relevant time limit as there was no obligation on the insurer to advise the insured that time was about to expire; it reasonably considered that the insured was aware of the relevant terms of the policy.

On insolvency, obtain insurance details quickly

It is difficult to give comfort to third parties faced with this type of problem and it is likely that an unfortunate tale along these lines may reoccur. Insurers are notably reluctant to see their policies disclosed while the insured remains solvent. However, once insolvency occurs and the 1930 (or soon the 2010) Act comes into play, third parties should immediately take the necessary steps to obtain details of insurance cover. The new Act will entitle them to make the relevant enquiries of brokers as well as the insured. However, under the new Act (as the old), the third party will be no better off than the insured would have been and so if rights have already been lost then the changes under the 2010 Act will not assist such a third party claimant.